United Kingdom

United Kingdom

On Reflection: Market reform must work for independents

The UK is facing an "energy trilemma": with 20% of conventional power stations due to retire by 2020, how do we cut carbon emissions, reduce our dependence on ever more expensive gas imports and deliver more energy at an affordable cost to consumers?


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This is a challenge all European countries share to varying degrees. Increasing wind-energy capacity ticks all these boxes, but this depends on the right regulatory environment to bring the investment forward in time. In the UK, all eyes are on the electricity market reform (EMR) currently going through parliament and whether it will be effective in providing investor confidence.

Between now and 2020, £110 billion (EUR 128 billion) is needed to deliver the low-carbon electricity future committed to by the UK. The EMR was needed because of pressures on the balance sheets of the big utilities and the recognition that achieving a low-carbon future would need international capital. Up to half of this investment is expected to come from independent energy developers. It is essential that the reforms enable independent generators to invest and play their full role.

Independent generators need an efficient and viable route-to-market. This is why the Independent Renewable Energy Generator Group, of which RES is a member, has developed a workable solution to be included in the energy bill - the green power auction market (GPAM). GPAM provides a short-term rolling power purchase agreement auction. By using the GPAM auction price as the market reference price against which the contract for difference (CfD) will be struck - rather than the day-ahead price as is currently proposed - GPAM creates a clear and financeable route to market for independent generators. Under the CfD system, generators will receive a top-up payment when the wholesale electricity price is below a pre-agreed "strike price" and pay money back when the price rises above it.

GPAM, which has been submitted to parliament, would result in an estimated £2 billion saving to the UK consumer over a decade and has the broad support of independent generators, small suppliers and investors.

Without GPAM, there will be a permanent reduction in renewable energy investment - either independent generators will be forced out of the market or the CfD strike price will have to increase to absorb the cost of securing a long-term power purchase agreement.

This uncertainty in the route to market comes at a time when investor confidence has been damaged by the wave of political uncertainty that has swept across Europe over the past five years. In some countries this has threatened existing investments.

In the UK, existing investments appear secure; but political risks and the lack of a clear route to market and of long-term targets in the energy bill undermine investor confidence.

To boost investor confidence, we need stable and workable national support mechanisms and an EU renewable-energy target beyond 2020.

Wind energy is a success story, and the policy can be fixed. In the UK, EMR is a crucial opportunity to get the right sustainable energy mix and kick-start infrastructure investment. With so much of this investment resting on the independent generators, it is critical that it works for us. Effective EMR should also create a wider, positive impact among the thousands of suppliers and small businesses that depend on the sector. It should be an example of a positive national support mechanism that, alongside a 2030 EU renewable energy target, will help the wind industry deliver the desired economic, social and environmental benefits that will come from a low-carbon economy.

David Handley is chief economist at renewable energy developer RES Group

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